"What we have on our hands is a sustainable, self-reinforcing economic recovery. It could be better. What’s holding it back is bad policy choices coming out of Washington, DC. Government spending is robbing the economy of potential and uncertainty about future taxes and regulation is a wet blanket.

I did not see where we have overall growth yet above breakeven levels. I do not see any projection of current growth rates that ever grows us out of the current deficit and debt crisis. Other than a potential electoral shift next Nov sending key people packing, I do not see any movement whatsoever on any of the "bad policy choices coming out of Washington, DC". Government spending is projected to keep growing, "robbing the economy of potential". Uncertainty about future tax rates is a certainty through summer and fall and longer unless the election is decisive one way or the other. Regulations at this point in time are scheduled to keep getting worse.

Regarding the entrepreneurial spirit, we are starting hundreds of thousands fewer new businesses today than we could or should be.

“The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.”

The U.S. economy, given its large size, needs to spawn something like 75 to 125 billion-dollar babies per year to feed the country’s post World War II rate of growth. Faster growth requires even more successful startups.

Retail sales declined 0.2% in May, up 5.3% versus a year ago To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 6/13/2012 Retail sales declined 0.2% in May, matching consensus expectations, but were down 0.8% including downward revisions for March/April. Retail sales are up 5.3% versus a year ago.Sales excluding autos declined 0.4% in May versus a consensus expectation that they would be unchanged. Retail sales ex-autos are up 4.3% in the past year.The decline in retail sales in May was led by gas and building materials. The largest gains were for autos and non-store retailers (internet/mail-order).Sales excluding autos, building materials, and gas were unchanged in May (-0.4% including downward revisions for March/April). This calculation is important for estimating real GDP. Even if these sales are unchanged again in June, they will be up at a 2.1% annual rate in Q2 versus the Q1 average.Implications: Retail sales were relatively soft in May, but do not signal a broader economic slowdown. Given the financial problems in Europe, some downbeat analysts are eager to fit every negative piece of news about the US economy into that framework. Instead, we think the tepid sales reports of the last couple of months are caused by much more mundane factors. The leading cause of the decline in May was a steep drop in gas prices. Excluding sales at gas stations, retail sales rose 0.1%. The second weakest category of sales in May was building materials, which fell 1.7%. This past winter was unusually mild. As a result, home construction (on a seasonally-adjusted basis) picked up quickly during that period and so did retail sales related to that construction. Now, those kinds of sales are reverting toward the underlying trend, which is still up 5.3% from a year ago. In addition, a combination of the mild winter, which made it easy to shop, and the earliest Easter in the past few years, may be skewing the seasonal adjustment factors in the Spring, making sales look good through March and worse – temporarily – in April/May. Regardless, “core” sales, which exclude autos, building materials, and gas, were essentially unchanged in May (+0.02%) and have only dropped once in the past twenty-two months, a remarkably consistent record of sales gains. Even if these sales are unchanged in June, they will be up at a 2.1% annual rate in Q2 versus the Q1 average, which is also what we are estimating for the growth of “real” (inflation-adjusted) personal consumption in Q2 (including goods and services). Don’t be fooled by statistical noise. The US economy continues to grow.

"The recent economic crisis left the average American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, reducing their net worth by almost 40%."

JDN, It's hard to follow your implied logic or stated question, but I will answer you anyway.

This is not about paying taxes, but the policy that triggered the collapse was an impending tax increase aimed at the rich, code-named 'letting the Bush tax cuts expire for the wealthiest Americans'.

Even though at year end the tax increase on the rich never in fact happened, it triggered an asset sell-off that we now know destroyed 40% of the wealth for people that were NOT targeted by the policies of the Pelosi-Reid congress and the incoming Obama administration in fall or 2008.

The 99% so to speak lost jobs, lost income and lost value in their existing investments including their homes, while the 1% who were targeted pulled back and are for the most still rich and doing okay.

Conclusion: We live in an interconnected economy. You can not target one group for punishment/confiscation, especially investors, capitalists, job creators without also hurting yourself and your family and your neighbors.

As to Buffet's meaningless words: "it's my class, the rich class, that's making war, and we're winning": NO. These policies came from the elected class and they were (ill-advisedly) supported by 53% (roughly) of the lower income 99% in 2006 and 2008. The 1% have great influence but no real political power in a representative republic.

Data Watch ________________________________________Industrial production declined 0.1% in May To view this article, Click Here Brian S. Wesbury - Chief Economist Robert Stein, CFA - Senior Economist Date: 6/15/2012 Industrial production declined 0.1% in May, coming in short of the consensus expected gain of 0.1%. Production is up 4.7% in the past year.Manufacturing, which excludes mining/utilities, declined 0.4% in May but was down 0.2% including upward revisions to prior months. Auto production fell 1.4% in May while non-auto manufacturing fell 0.3%. Auto production is up 25.0% versus a year ago while non-auto manufacturing is up 3.8%.

The production of high-tech equipment rose 0.5% in May, and is up 0.8% versus a year ago.

Overall capacity utilization moved down to 79.0% in May from 79.2% in April. Manufacturing capacity use fell to 77.6% in May from 78.0% in April.

Implications: Overall industrial production dipped 0.1% in May. Manufacturing, which excludes mining and utilities, fell 0.4 percent. Both figures came in slightly below consensus expectations. However, industrial production is still up 4.7% from a year ago, growing more than twice as fast as the overall economy. The data we watch most closely is manufacturing production ex-autos. This figure fell 0.3% in May, but has risen in 9 of the last 11 months. That’s a very good track record, given that manufacturing ex-autos usually falls three or four times a year even during normal economic expansions. In other words, it is much too early to read anything significant into the slippage in production in May. Given low inventories, particularly in the auto sector, we don't expect any persistent stagnation. Although capacity utilization declined in May, it is still up substantially from a year ago. As a result, companies have an increasing incentive to build out plant and equipment. Meanwhile, corporate profits and cash on the balance sheet show they have the ability to make these investments. In other news today, the Empire State index, a measure of manufacturing activity in New York, fell to +2.3 from +17.1 in May. This suggests growth continued in June, but at a slower pace than in May. However, these kinds of surveys are also influenced by corporate sentiment rather than actual activity, and, given news out of Europe, we would not be surprised if this were having a negative effect.

The Federal Reserve issued a report this week on the amount of cash held by U.S. corporations, and it amounts to about half a trillion dollars less then previously thought. Non-financial corporations still hold $1.74 trillion in liquid assets, an unprecedented amount. But as The Wall Street Journal's Ben Casselman writes, "Perhaps more significant than the number itself, however, is how the revision affects the trend. Before the revision, the Fed showed corporations continuing to accumulate cash, with liquid assets rising nearly every quarter since the recession ended and reaching a record $2.2 trillion at the end of last year. Now, however, it appears corporate cash piles grew rapidly through 2009, then leveled off. Companies aren't spending their cash, but they aren't holding more of it, either."The Fed's finding puts a significant dent in Barack Obama's claim that corporations are just "sitting on the sidelines" and refusing to invest in the economy.

The point that overturning Obamacare could be very good for the economy and the market seems plausible to me.

The Second Step: Supreme Court To view this article, Click Here Brian S. Wesbury - Chief Economist Robert Stein, CFA - Senior Economist Date: 6/25/2012 Step Two of our Four Steps to Recovery will happen sometime this week. The wait for the Supreme Court to issue its decision on whether President Obama’s health care reform law is constitutional is almost over.“Obamacare” is the president’s signature legislative achievement. His legacy largely hinges on how the case is decided. If the law is fully upheld and if the president wins re-election, the odds of fully implementing the law go way up. In combination, these two events would codify the US’s move toward a cradle-to-grave social welfare state (emulating much of Europe). This would reduce the growth potential of the US economy and further diminish price-earnings ratios. As of right now, before the Court issues its decision, we think this combination is highly unlikely. Much more likely is the Court striking down the mandate to buy health insurance as well as other parts of the law that go with the mandate, like the requirement that insurance companies cover all applicants, with no price difference based on health status.

It is entirely possible the Court strikes down the entire law. Oral arguments suggested that the Court understood striking down a major feature of the health care law and letting the rest stand would, in effect, re-write the law in a way Congress never intended. In other words, striking down all the law could be a more restrained decision than striking down just part of it.

If the Court lets most of the law stand, the voters would still get a chance to throw out the rest. Right now, 61% of Americans oppose the mandate, while at the same time supporting other parts of the bill. A new Senate and House, and possibly a new President could use the same special budget procedures that were used to enact Obamacare to repeal what was left. Even if the GOP does not sweep all races, the law is so unpopular that many parts of it could likely change.

In other words, right now the path to getting the law fully implemented is very narrow. Equity markets do not seem to realize this. Neither do businesses that seem to be holding back on investment and hiring decisions temporarily because the Supreme Court ruling is so close. If the Court starts the ball rolling by declaring the mandate unconstitutional, look for the economy and stock markets to take a sharp turn for the better.

Supporters of bigger government and higher taxes have lusted after a federally-dominated national health care system for multiple generations. Losing now, after they had a supportive president and a filibuster-proof majority in the Senate would be demoralizing.

By contrast, the advocates of smaller government and lower taxes would have the winds at their backs. It would be the second step of what we are calling the Four Step Process to Recovery. The first step was Governor Scott Walker’s recent victory in Wisconsin. Although many governors of both major parties have taken on government unions, the unions decided to make Walker the poster child and lost badly.

So, step two would highlight a shift in the direction of the American political environment.

In the late 1960s and 1970s, the Great Society programs of President Johnson moved the US to a bigger government. Equity markets went nowhere for 17 years. Then government shrank substantially under Reagan and Clinton, and equities soared once this process got underway.

The stage is being set for government to shrink once again. And, if so, equities are exactly the place to be.

Capacity utilization has always been something I have thought worthy of attention-- Marc

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Data Watch ________________________________________New orders for durable goods increased 1.1% in May To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 6/27/2012 New orders for durable goods increased 1.1% in May, beating the consensus expected gain of 0.5%. Orders excluding transportation rose 0.4%, coming in slightly below the consensus expected gain of 0.7%. Overall new orders are up 4.6% from a year ago, while orders excluding transportation are up 3.8%.The gain in overall orders was led by machinery and aircraft, while other categories of orders were mixed.The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft. That measure rose 0.4% in May. If these shipments are unchanged in June, they would still be up at a 1.7% annual rate in Q2 versus the Q1 average.Unfilled orders were flat in May but are up 8.3% from last year.Implications: New orders for durable goods rose more than the consensus expected in May, up 1.1%, and the underlying trend remains favorable, up a healthy 4.6% in the past year. The gain in May was mostly due to the transportation sector, which is very volatile from month to month, but orders were still up 0.4% even excluding transportation. We expect this number to pick up steam over the rest of the year. Unfilled orders (ex-transportation) are up 9.1% in the past year and are now at record highs. Also, we are in the early stages of a home building recovery. As housing continues to improve, orders for durables should pick up as well. Shipments of “core” capital goods (which exclude defense and aircraft) rebounded in May after dropping steeply in April. These shipments have dropped in the first month in nine of the past ten quarters, with a rebound in the following two months. So if the trend continues we should see this number higher in June. Business investment should continue to grow. Monetary policy is loose, interest rates are extremely low, and profits are at record highs while companies have record amounts of cash on their balance sheets. Moreover, capacity utilization at US factories is approaching its long-term norm, meaning companies have a growing incentive to update their equipment. In other recent manufacturing news, the Richmond Fed index, a measure of factory activity in the mid-Atlantic, declined to -3 in June from +4 in May. A negative reading, suggesting some contraction, is not good, but the index was -10 in August last year while the US economy was still growing. In other words, the decline does not signal a recession. Meanwhile, the housing market shows marked improvement. The Case-Shiller index, which measures home prices in the 20 largest metro areas, increased 0.7% in April (seasonally-adjusted), with 17 of the 20 metro areas showing price increases. Although prices are still down 1.9% from a year ago, they are up at a 6.2% annual rate in the past three months.

Data Watch ________________________________________The ISM manufacturing index declined to 49.7 in June To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 7/2/2012 The ISM manufacturing index declined to 49.7 in June from 53.5 in May, coming in well below the consensus expected 52.0. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)Most major measures of activity fell in June. The new orders index fell to 47.8 from 60.1, the production index fell to 51.0 from 55.6, and the employment index declined to 56.6 from 56.9. The supplier deliveries index ticked up to 48.9 from 48.7.The prices paid index dropped to 37.0 in June from 47.5 in May.Implications: For the first time since mid-2009, the ISM Manufacturing index came in below 50, signaling contraction in the factory sector. However, it’s important to keep in mind that when financial strains, such as recent news out of Europe, push down consumer confidence, it also often pushes down the ISM index as well. In other words, today’s below-50 ISM index does not signal a recession and probably underestimates actual business activity in the factory sector. Notably, the employment index fell only slightly, to a still robust 56.6. On the inflation front, the prices paid index plummeted to 37.0 in June, the lowest level since April 2009, reflecting the steep recent drop in energy prices and other commodities. Given the loose stance of monetary policy, we expect the ISM index to soon rebound, both for activity indicators as well as prices. For the time being, though, today’s ISM report is consistent with our forecast that real GDP grew at about a 1.5% annual rate in Q2. In other news this morning, the Census Bureau reported that construction spending increased 0.9% in May, easily beating the consensus expected gain of 0.2%. The gains in May were led by housing, which was up 3%. Commercial construction was up 0.4%, led by manufacturing facilities. Government projects fell, largely due to less school construction.

________________________________________The ISM non-manufacturing index declined to 52.1 in June To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 7/5/2012 The ISM non-manufacturing index declined to 52.1 in June, coming in below the consensus expected 53.0. (Levels above 50 signal expansion; levels below 50 signal contraction.)The key sub-indexes were mostly lower in June but all remained above 50, signaling expansion. The new orders index declined to 53.3 from 55.5, the business activity index fell to 51.7 in June from 55.6, and the supplier deliveries index declined to 51.0 from 53.0. The employment index rose to 52.3 from 50.8.The prices paid index dropped to 48.9 in June from 49.8 in May.Implications: The service sector continued to grow in June but at a slower pace, with the ISM service sector composite coming in at the lowest level since early 2010 and the sub-index for business activity at the lowest level since late 2009. We think the bad financial news coming out of Europe may be holding down the index relative to actual levels of activity, but also note that, at just above 50, the indexes are consistent with other data suggesting real GDP growth of 1% to 1.5% in Q2. Notably, however, the employment index strengthened to 52.3 from 50.8, suggesting service sector firms do not anticipate persistent weakness. It also helps confirm other recent positive data on the labor market (discussed below). On the inflation front, the prices paid index fell to 48.9. This is consistent with other indicators showing a temporary moderation in inflation. However, given the loose stance of monetary policy, we don’t expect the lull to last. In other recent news, two good reports on the labor market earlier today. The ADP employment report showed an increase of 176,000 private sector jobs in June, easily beating the consensus expected 100,000. New claims for jobless benefits declined 14,000 to 374,000, the lowest level in six weeks. Continuing claims increased 4,000. These indicators suggest tomorrow’s official Labor Department report will show a 120,000 increase in nonfarm payrolls and a 130,000 gain in private payrolls. In other recent news, autos and light trucks were sold at a 14.1 million annual rate in June, better than the consensus expected, up 2.2% from May and up 22% from a year ago. No matter how they answer surveys about how they feel, American consumers are behaving like they’re more confident. No sign of a recession in any of these numbers.

"the indexes are consistent with other data suggesting real GDP growth of 1% to 1.5% in Q2."

"No sign of a recession in any of these numbers."

I notice that Brian Wesbury and all other economists or economic reporting firm or agency do not use CBO / OMB / Washington DC baseline budgeting rules for GDP reporting. A question for Wesbury (or Scott Grannis etc.): If they were required to adjust GDP reporting for 'baseline growth', then what would be magnitude of the economic growth or contraction we are currently experiencing?

I'm not clear on your point here. I think I know what baseline budgeting is, but what is "baseline growth"? How is that "breakeven"?

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Separately, here this from Wesbury. Seems like a relevant point to me , , ,

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Business Investment Dwarfs HousingSince 2008, the market punditry has focused on housing, housing and housing. Business news channels have housing experts who report on every housing number as if it were the golden key to all economic activity. People say “we can’t have a recovery without housing.” Conventional wisdom has an obsession with housing.We find this somewhat understandable. Housing was the crisis. Housing is important. Building homes creates jobs, houses represent personal wealth, mortgages are typically the largest single debt of individuals. We get it.At the same time we think all this focus on housing is misplaced…at least when it comes to analyzing the economy. Business investment is much more important and the economy has recovered even though housing has been in the doldrums for a long time.Home building was just 2.2% of GDP in 2011 and houses do not create future wealth. Business investment in equipment and software was 7.4% of GDP in 2011 and this investment is what drives productivity and profits. Business investment creates wealth; houses are where we put wealth.Investment Is BoomingBusinesses invest in three different things – structures, inventory and “equipment and software.” Business structures, like housing, were overbuilt and have yet to recover. Business inventories plummeted by about $200 billion in 2008 and 2009, and have recovered most of that, but not all. But business investment in equipment and software has boomed. In fact, it’s at an all-time record high in both nominal and real terms.Business investment in equipment and software, fell from $1.12 trillion at an annual rate in Q4-2007 to $890.5 billion in Q2-2009, a drop of 22%. But then, after mark-to-market accounting rules were fixed, businesses turned on the investment engines in a big way. Investment has increased at a 10.8% annual rate since then, up 11 consecutive quarters and now stands at $1.18 trillion. Businesses have invested $2.3 trillion in the past two years.During those same two years, investment in housing has been just $690 billion. In other words, if you want to understand why the economy has grown, look at business investment in equipment and software, not housing. In fact, anyone who focused too much on housing would have remained much more bearish about the economy than they should have.Business investment, in the cloud, smartphones, tablets, new machinery, drilling and fracking equipment, railcars, drugs, and telecommunications raises productivity and lifts profitability. This is what creates growth. And that’s what the conventional wisdom missed in recent years.

Aren't we in fact moving backwards based on population growth and other factors when reported GDP 'growth' is this low. If economists made the economic and demographic adjustments that government spending budgets are required to use, then Obamanomic growth would be at prolonged negative levels, fitting the rough definition of a recession we are allegedly not in.

My view is the economists with their generally accepted measurements and definitions are parsing words pretty carefully to say this backward moving economy is not in recession.

Call it stagnation, malaise or stuck, but the tide is not rising, much less lifting all boats. MHO.

Put it this way: While we were mostly not in recession by these measurements, we lost 40% of our wealth! There is something wrong with this picture.

Average weekly earnings – cash earnings, excluding benefits – were up 0.3% in June and up 2.0% versus a year ago.Implications: The plowhorse economy keeps moving forward, but seems to have hit some clay. Improvement in the labor market remained tepid in June, suggesting the slowdown in job creation in the past few months may be more than just a hangover from an unusually mild winter, when job creation averaged 250,000 per month. Payrolls have expanded only 75,000 per month the past three months, 91,000 in the private sector. One possibility is that some firms have been waiting for the Supreme Court ruling on health care, which could have given them clarity on the cost of hiring. However, with the Court letting the law stand, these firms now have to wait for the election, which means this headwind will remain in place. However, much of the data in today’s report was better than the headline payroll number. Civilian employment, an alternative measure of jobs that includes small business start-ups, grew 128,000 in June and is up an average of 235,000 in the past year. This easily beats the average of 148,000 for nonfarm payrolls. Traditionally, when civilian employment grows faster than payrolls, payrolls tend to accelerate. Also, total hours worked hit a new high for the recovery and are up 2.1% versus a year ago. Combined with gains in average hourly earnings, total cash earnings (which do not include fringe benefits) are up 4.1% from a year ago. With consumer prices up only about 1.5% from a year ago, these wage gains mean workers have growing purchasing power. The unemployment rate stayed at 8.2% in June, with the labor force growing 156,000. In the past year, the labor force is up 1.5 million, while the unemployment rate has dropped 0.9 percentage points. The U-6 unemployment rate, which includes discouraged workers and part-time workers who say they want to work full-time, ticked up to 14.9% in June. Usually the U-6 unemployment rate is about 75% higher than the official unemployment rate. Right now it’s 82% higher, which is still within the normal historical range. The bottom line is that there is plenty of information in today’s report to support anything from mild pessimism to mild optimism. Given loose monetary policy and a recovering – and labor intensive – housing industry, we think payroll growth will pick up in the second half of the year.

Monday Morning Outlook ________________________________________Unemployment a Secular Problem To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 7/9/2012 Last Friday’s employment report was a Rorschach test for economists. (You know, show an inkblot and find the obsession.) It’s not a surprise that the response to the report was pessimistic. We heard all kinds of rhetoric, including a new one - “Zombie Economy.”A Zombie is an “animated corpse brought back to life by mystical means.” We think the pundits who dreamed this one up are saying stimulus brought the economy back to life, barely. And they think this fits recent soft payroll data. Payroll gains have slowed to 75,000 per month in Q2 from 226,000 per month in Q1. The jobless rate seems stuck around 8.2%.But there was some better data, too. Private payrolls did rise – for the 28th straight month – and the jobless rate is stable, not rising as it would in a recession. Moreover, the same slowing in jobs data happened at about the same time last year, which suggests some problems with seasonal adjustments. On a not-seasonally-adjusted basis, the US added 815,000 new jobs in June, which is a very active Zombie.Civilian employment, an alternative measure of job creation that includes small business start-ups rose 128,000 in June. In addition, total hours worked in the private sector hit a new high for the recovery.The Zombie label is a misnomer, this economy is not the walking dead…it never really died; it’s the same economy, but it is carrying a heavier burden. Investors, analysts, and economists are comparing today’s jobless rate to recent cycles. The boom of the 1980s brought the jobless rate down to 5.0%, in the dot.com era of the 1990s it fell to 3.9%, and during the housing bubble of the 2000s unemployment fell to 4.4%.They should be comparing it to Europe’s sustained high level of joblessness in recent decades or to the US in the 1970s. The unemployment rate is high today because of secular, or long-term, issues, not cyclical, short-term issues.Government spending, regulation and taxation, including the anticipation of Obamacare, are weighing on economic activity and pushing up the unemployment rate. It’s like putting a 250 lb. jockey on a race horse or making a Plow Horse move through clay. Government was big in the 1970s which boosted unemployment. Government shrunk in the 1980s and 1990s and unemployment fell.In recent years federal spending has climbed to about 25% of GDP – the highest on record absent a full-mobilization war, like World War I or II. As long as government remains this large – and it will if health care reform is not overturned by the voters this November – no one should reasonably expect the jobless rate to go down anywhere near prior lows.In other words, we take the secular side of the recent debate. We believe high unemployment is here because government is too big. Not surprisingly, many government officials, including IMF chief, Christine Lagarde, argue that high unemployment is a cyclical issue that can be fixed by stimulus. They urge more spending and more Fed ease.But, this makes no sense. If government takes money from business to spend on highways or solar energy, jobs are created. However, the money can’t be used twice, and the private sector is smaller and has fewer jobs. If government is more productive with its funds than the private sector then the economy wins. But history shows that when government is big, unemployment is higher than when government is small.And when government is big, even monetary policy cannot boost growth for long. In 1979, the Fed drove unemployment down to 5.6%, but created double-digit inflation in the process. It wasn’t until the 1980s, when government spending was reduced as a share of GDP, tax rates were cut, and the Fed tightened, that unemployment fell permanently.If the IMF and global politicians want lower unemployment and faster growth, they need to stop stimulating and start cutting. Lower marginal tax rates, freer trade, and a smaller welfare state are the answer. Until then, be happy with a Plow Horse. It ain’t a race horse, but it ain’t a Zombie either.

Retail sales declined 0.5% in June, coming in below the consensus expected gain of 0.2%. Sales were down 0.8% including revisions for April/May. Retail sales are still up 3.8% versus a year ago.Sales excluding autos declined 0.4% in June versus a consensus expectation that they would be unchanged. Retail sales ex-autos are up 3.0% in the past year.The decline in retail sales in May was led by gas, autos, and building materials. The largest gain was non-store retailers (internet/mail-order).Sales excluding autos, building materials, and gas were down 0.1% in June (-0.3% including downward revisions for April/May). This calculation is important for estimating real GDP. These sales were up at a 1.1% annual rate in Q2 versus the Q1 average.Implications: Retail sales slowed again in June, falling for the third month in a row. The leading cause of the decline in June was a steep drop in gas prices, which is not a cause for concern. Auto sales also declined, but this stands in contrast to industry figures on unit sales in June, which showed an increase of 2.3%. The underlying trend in auto sales has been upward and we expect the trend to reassert itself over the next few months. Building materials also dropped in June, but weakness over the past three months is a by-product of unusual strength this winter, when the weather was unusually mild. Given the turn in home building, purchases of building materials will be heading up soon. The biggest negative in today’s report was that “core” sales, which exclude autos, building materials, and gas, were down slightly (-0.1%) for the second time in three months. However, these sales were still up at a 1.1% annual rate in Q2 versus the Q1 average. Factoring in consumer spending on services as well as inflation, we are forecasting that overall “real” (inflation-adjusted) consumer spending was up at a 1% - 1.5% annual rate in Q2. The retail sales report adds to the case that the economy grew at a slow pace in Q2, but it is not in another recession or about to fall into one. Bolstering the case for an acceleration in the second half, the Empire State index, which measures manufacturing activity in New York, increased to +7.4 in July from +4.0 in June. The index for employment rose to a very strong +18.5 from +12.4.

Monday Morning Outlook ________________________________________Stocks are Really Cheap To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 7/16/2012 America’s equity markets have rallied sharply since last October, with the S&P 500 up 22%. Nonetheless, the stock market has been stuck in a range for 18 months, with the Dow Jones Industrials Average trading between 10,650 and 13,280, well below the October 2007 high of 14,165.Financial markets have priced in all kinds of bad things – a fiscal cliff, slower earnings growth, a potential recession, and big government. Along with range-bound stocks, the 1.5% 10-year Treasury yield seems to confirm this.But, we think these markets are overly pessimistic. We don’t buy the fears about the fiscal cliff. Regardless of the outcome of the election, most likely, the 2001/03 tax cuts will end up getting extended another year or two, while military spending cuts get postponed. And, if anything, cutting non-defense spending would spur growth.We are more sympathetic with fears about prolonged slow economic growth and the burden of big government. If they remain an issue, the market would be correct to expect less in the way of future after-tax profits. Slower economic growth would boost deficits, while unchecked government spending would increase the odds of higher future taxes.But the stock market is significantly undervalued already. If the future turns out to be less dour, investors should look out above.We use a capitalized-profits model to find the fair-value of equities. We divide corporate profits by the current 10-year Treasury yield (1.5%), and then compare the current level of this index to each quarter for the past 60 years. This method estimates a fair-value for the Dow at an absurdly high 63,000. Yes, you read that right, that’s almost five times the current level.Obviously, this seems crazy. We agree. It’s a result of using artificially low long-term interest rates. So, we adjust the model and assume the appropriate 10-year Treasury yield would be in the 4% to 5% range. Using a more conservative discount rate of 5% gives us a fair value of 18,700 on the Dow and 1,985 for the S&P 500.Alright, that seems more reasonable. But what if record high corporate profits – about 13% of GDP – revert to their historical norm of about 9.5%, at the same time the 10-year Treasury yield moves to 5%? If that happened, the fair value of the Dow would be 13,900 and for the S&P 500 it would be 1475. In other words, if profits fall roughly 25% and interest rates more than triple from current levels, broad stock market indices are still undervalued.None of this means the stock market is going to rally today, or this week, or even over the next year. What it means is that the upside risks for stocks are much greater than the downside risks. The capitalized profits model says clearly that the stock market is currently discounting a very bleak future.If, like us, you believe there are dangers in the years ahead, but that US growth will push profits higher over time and that the odds of a positive turn in fiscal policy are real, then equities are really cheap.

Industrial production rose 0.4% in June (0.1% including revisions to prior months) versus a consensus expected gain of 0.3%. Production is up 4.6% in the past year.Manufacturing, which excludes mining/utilities, rose 0.7% in June (0.3% including downward revisions to prior months). Auto production rose 1.9% in June while non-auto manufacturing gained 0.5%. Auto production is up 26.3% versus a year ago while non-auto manufacturing is up 4.1%.The production of high-tech equipment rose 0.2% in June, but is down 0.8% versus a year ago.Overall capacity utilization moved up to 78.9% in June from 78.7% in May. Manufacturing capacity use rose to 77.7% in June from 77.3% in May.Implications: No sign of a recession in today's numbers. Overall industrial production rose 0.4% in June. Manufacturing, which excludes mining and utilities, rose a very strong 0.7%. Industrial production is up 4.6% from a year ago, growing more than twice as fast as real GDP – so much for the idea that manufacturing is lagging. The data we watch most closely is manufacturing production, excluding the auto sector. This rose 0.5% in June, and has risen in 10 of the last 12 months. That’s a very good track record, given that manufacturing ex-autos usually falls three or four times a year even during normal economic expansions. In other words, the economy looks to be stirring out of the soft patch, not stagnating further. The report stands in stark contrast to the national ISM manufacturing survey that said manufacturing contracted in June. We attribute that gap to negative sentiment – Europe, energy and politics. Given low inventories, particularly in the auto sector, we expect production to keep growing. Capacity utilization rose to 78.9 in June and it is still up substantially from a year ago. As a result, companies have an increasing incentive to build out plant and equipment. Meanwhile, corporate profits and cash on the balance sheet show they have the ability to make these investments. In other news, the NAHB index, a measure of homebuilder confidence, increased to 35 in July, the highest level in over five years and the largest monthly gain in almost a decade. The plow horse economy continues to move forward.

We estimate real GDP grew at only a 0.9% annual rate in Q2. The Plow Horse Economy hit a tough spot, but it hasn’t hit the wall. In Q1-2011, real GDP grew at just 0.4% at an annual rate, but then accelerated again.

In other words, this is not the end of the world. It’s not a recession. The economy is still growing. It could grow faster if the US made better public policy choices. Under both President Bush and Obama, government spending grew. Our Plow Horse has had a heavy load to pull. In economic terms, potential GDP is lower, while unemployment is higher, than it would have been without the growth in government spending.

We expect real GDP to pick up in the second half of the year, with the improvement tilted toward the fourth quarter. In other words, we do not expect either a surge or collapse in economic data to influence the election in November. What the voters see is what they get: pockets of entrepreneurial brilliance offset by the weight and uncertainty of government spending, regulation, and taxes.

Consumption: Auto sales fell at a 35% annual rate in Q2, while “real” (inflation-adjusted) retail sales ex-autos declined at a 2.1% rate. However, services make up about 2/3 of personal consumption and they grew in Q2. So far, it looks like real personal consumption of goods and services combined, grew at a 1.1% annual rate in Q2, contributing 0.8 points to the real GDP growth rate. (1.1 times the consumption share of GDP, which is 71%, equals 0.8.)

Business Investment: Business investment in equipment and software and commercial construction grew at an annualized 4% rate in Q2. This should add 0.4 points to the real GDP growth rate. (4 times the business investment share of GDP, which is 10%, equals 0.4.)

Home Building: Residential construction is headed for its fifth straight positive contribution to real GDP. The growth is still led by apartment buildings, but single-family construction is also on the mend, and the pessimists can no longer say it’s a temporary blip from unusually mild winter weather. Home building appears to have grown at about a 13% annual rate in Q2. This translates into 0.3 points for the real GDP growth rate. (13 times the home building share of GDP, which is 2.3%, equals 0.3.)

Government: Military spending continues to decline and state/local government construction is still under pressure from budget cuts. On net, real government purchases shrank at about a 0.5% rate in Q2, which should subtract about 0.1 percentage points from real GDP growth. (-0.5 times the government purchase share of GDP, which is 20%, equals -0.1).Trade: At this point, the government has only reported trade data through May. On average, the “real” trade deficit in goods has grown compared to the Q1 average. Also, in the last few years, seasonal adjustment factors for oil have made the Q2 trade deficit look larger in the GDP accounts than in the monthly Census data. As a result, we’re forecasting the trade sector subtracted 0.7 points from the real GDP growth rate.

Inventories: As always, inventories are the wild card. We only have “real” inventory figures through April, when they were up at a solid pace. Nominal inventories were up at a moderate pace in May and we’re assuming another moderate gain in June. This should generate a very small addition of 0.2 points to the real GDP growth rate in Q2.

Add-em-up and you get 0.9% real GDP growth for Q2. It’s nothing to write home about – just another Plow Horse report. For now, despite all kinds of stumbling blocks, the US economy just keeps plodding along.

Taking on Wesbury spin, not the messenger. ) I always appreciate his data. Unbelievable that he still has something positive to say at 0.9% growth.

FWIW, apartment building construction growth means some construction jobs but also during a foreclosure epidemic means roughly that for each unit or two built a foreclosed home may never be sold. Homes that are torn down and not replaced destroy the tax base in the most fiscally troubled municipalities. Translation: worse than a zero sum game because the losing sector still needs a bailout.

He says Plow Horse Economy, I say a 'you reap what you sew' economy.

Actually his plow horse characterization matches my 'wagon' analogy. Some people pull the wagon and some people ride. Some of the very poorest, some of the handicapped and some of the elderly can't pay all of their own way and some some who are capable need a hand up for a short time. When we started accepting that 50% can ride and half of the rest are kids, the load got too heavy what is left of private enterprise to pull. The Dem answer to that: let 99% ride; 1% can pull.

Conventional wisdom is that the housing bubble caused the crash. But we had versions of a housing bubble for a decade leading up that crash. What caused the crash? Greed caused the crash? No. Greed (self interest) is constant, the crash had specific timing.

It was (IMHO) the impending tax increases. (As I have written before) Investors needed to not only sell their assets before 12/31/2008 to capture gains at the old rate, but they also needed to sell them before the other investors sold off or else there is little or no profit to tax anyway. And the panic began.

September is when people start paying attention for elections and for year end. This year we face the same fiscal cliff as 2008, just fewer gains and investments to sell off. All economists say you don't raise tax rates in a recession because of the damage it will cause, yet for all practical purposes, that is what's coming.

There was a bubble, with housing and artificially interest rates at its center. Obama passed McCain in the polls pretty much exactly when the market tanked, so that seems good circumstantial evidence to me that his programs and taxes triggered the rush for the exits, but I would call that the pin that popped the bubble. As cap and trade failed, the stock market partially recovered.

Agreed. There was both a bubble and a pin that popped it. There was both the economic threat of the incoming administration and also the economic damage of an anti-growth congress in power headed for certain reelection. (Obama was part of that too.)

The current fiscal cliff scheduled for year end is estimated to be a two million job killer in 2013, a little less than we lost in 2008-2009. The other name for this policy feature called fiscal cliff should be recession-guarantee. Cancelling it at the last moment again does not undo damage already occurring and certain to accelerate. Somebody (Bill Clinton?) needs to talk to the President (and the Dem Senate) about fixing it right now or this will become a career-ending move for the President. 40 consecutive months of unemployment above 8% and now he has set the table for a standoff that will guarantee a downturn on the home stretch of his one shot at reelection.

When investors see tax rates rising and job losses in the millions coming (aka recession) the instinct is to sell, with or without a bubble.

The First Estimate for Q2 Real GDP Growth is 1.5% at an Annual Rate To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 7/27/2012 The first estimate for Q2 real GDP growth is 1.5% at an annual rate, almost exactly the 1.4% the consensus expected.The largest positive contribution to the real GDP growth rate was personal consumption, followed by business investment in equipment & software.The weakest components of real GDP were net exports and government purchases, each of which reduced the real GDP growth rate by 0.3 points.The GDP price index increased at a 1.6% annual rate in Q2. Nominal GDP – real GDP plus inflation – rose at a 3.1% rate in Q2 and is up 3.9% from a year ago.Implications: The plow horse economy rolls on, with real GDP growth still hovering in a tepid limbo, rather than strong growth or recession. Real GDP grew at a 1.5% annual rate in the second quarter, right in-line with consensus expectations. We’ve been tracking real “private” GDP (real GDP excluding government purchases), which grew at a 2.2% annual rate in Q2 and is up 3.3% in the past year. The brightest spot in the report was that home building increased at a 9.7% annual rate in Q2, the fifth consecutive quarterly increase. Today’s report included “benchmark” revisions to GDP data over the past few years, including upward revisions to the pace of growth in 2009 and 2011 and a downward revision to 2010. So for example, as of yesterday the government was saying real GDP only grew 2% in the year ending in the first quarter; now it shows growth of 2.4% in the same period. Corporate profits were revised down for the past few years, all due to domestic firms. However, the growth rate of profits in the past year was revised upward. Meanwhile, labor compensation, particularly fringe benefits, were revised upward. In terms of income, about 0.5% of the economy was shifted from corporate profits to worker compensation. More immediately relevant to policymakers, we find no justification for a third round of quantitative easing in today’s report. The benchmark revisions moved nominal GDP slightly upward and that figure is up 3.9% in the past year and up at a 4% annual rate in the past two years. These are not that far from the Federal Reserve’s long-run outlook of a 4.5% growth rate for nominal GDP and much too fast for a short-term interest rate target near zero percent. Getting the economy growing faster requires changes to fiscal and regulatory policy, not monetary policy.

Investing in gold only makes sense if you could later trade it for a tangible currency. However the world has no stable tangible currency anymore. Therefore I cant see gold as a great investment. At least not now. Your best investment is in skills. Just my opinion, but Im interested in any ideas that are counter to this. I would love to be wrong.

Why the Long Face? To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 8/6/2012 Back in early 2009, the University of Chicago Booth School of Business and the Northwestern University Kellogg School of Business teamed up to create the Financial Trust Index. The latest readings from July 2012 show that just 21% of Americans trust the financial system and only 15% trust the stock market.For many, this negativity is understandable. The stock market is still below levels it reached in 2000, housing prices are still down and many people just cannot shake off the fear that was created in the 2008/09 Panic.But, the lack of trust must be about more than this. Since the bottom for equities on 3/9/2009, when the Booth/Kellogg survey found just 13% trust in the stock market, the S&P 500 is up 120%, with dividends included. More importantly, the S&P 500 index is up more than 1100% in the past 30 years.In addition, real GDP has been growing now for 12 consecutive quarters, private payrolls have climbed for 29 consecutive months and housing has clearly turned a corner. Yes, there have been slow patches (in 2010, 2011 and 2012), but in each case, even this year, the economy picked up again without falling into recession.In other words, the negativity (the lack of trust) seems excessive. It is ignoring the good parts of the past and focusing on the bad parts.Or, maybe there is another explanation. Right now the political fog is so thick that you can cut it with a knife. And, because politicians find it effective to scare people into voting for them over the other guy, our political leaders and their spokesmen and women are very busy trying to find things to make us worry about.For example, last Friday, it was reported that payroll employment rose 163,000 in July, which was much better than expected and a sign that a recession is still unlikely.Nonetheless, the political spinmiesters focused on every negative piece of the jobs data they could find. The unemployment rate rose to 8.3% and if we add discouraged workers, it was 15%. The labor force participation rate, which the bears ignored in the past few months, fell in July. The sky is falling they said.And when the right side of the political equation says all these negative things, the left side says another Great Depression is coming unless the US government spends more money or the Fed prints more money.So, the average investor reacts with fear when leaders everywhere are bashing the economy and telling everyone that will listen that the world is about to come to an end if their plans aren’t followed immediately.Don’t get us wrong, our models clearly show that the economy could, and would, do better if government spending were reduced as a share of the economy. Moreover, uncertainty over regulations, new healthcare laws and the potential of future tax hikes are also holding growth down and unemployment up. But that doesn’t mean that the economy is about to fall into recession or the stock market is about to collapse.We expect the economy will continue to expand, earnings will continue to grow and stock prices will continue to rise.The reason for our optimism is relatively simple. Technology, driven forward by the relentless spirit of entrepreneurs that don’t let political fears stop them, continues to raise productivity. This is happening despite what we think is wrong-headed fiscal policy.In addition, the Fed is not tight, which is the number one cause of recession. We do not expect the Fed to pull the trigger on QE3, but quantitative easing was never necessary for growth. The Fed’s near 0% federal funds rate is enough and always has been.In the end, the way for investors to avoid mistakes in this environment is to watch the data and avoid the political spin. The economy is not great, but with so few people trusting the market and financial system, opportunities abound. If the market can hang in there with so little support, imagine what happens if fiscal policies turn for the better.

The trade deficit in goods and services came in at $42.9 billion in June, much lower than the consensus expected $47.5 billion. Exports increased $1.7 billion in June, while imports declined $3.5 billion. The gain in exports was led by consumer goods while the fall in imports was led by oil. In the last year, exports are up 7.1% while imports are up 2.2%.

The monthly trade deficit is $7.4 billion smaller than a year ago. Adjusted for inflation, the trade deficit in goods is $6.3 billion smaller than last year. This is the trade measure that is most important for measuring real GDP.

Implications: The trade deficit shrunk much more than expected in June, a result of an increase in exports and another oil-led decline in imports. Exports are now at all-time record highs and do not show any clear signs of slowing due to the financial situation in Europe or a slowdown in China. Exports of goods to the Euro area are up 6.3% in the past year while exports of goods to China are up 10.2%. For GDP purposes, today's figures were much stronger than the government assumed when estimating Q2 real GDP growth. Along with better numbers on construction and inventories, we now estimate an upward revision to about 2.5% for Q2 from an original government report of 1.5%. Meanwhile, increasing energy production in the US is having large effects on trade with other countries. Real (inflation-adjusted) oil exports have tripled since 2005, while real oil imports are down substantially. As a result, the real trade deficit in oil has been cut almost in half in the past several years and is the smallest since at least the early 1990s. The US trade deficit is also caught between two powerful opposing forces. On one side, the large depreciation in the foreign exchange value of the dollar in the past decade means the US is a much more attractive place from which to export. Many foreign automakers are now using the US as an export hub and companies that had previously placed operations abroad are now moving them back home. The level of productivity is high, so unit labor costs are low in the US relative to other advanced economies. However, the resilient US consumer still likes imported goods. We think the trade sector will be, on average, a small negative for real GDP growth in the year ahead. This is the normal outcome when the US economy is growing. In other news this morning, new claims for jobless benefits declined 6,000 last week to 361,000. Continuing claims for regular state benefits rose 53,000 to 3.33 million. These figures are consistent with more moderate payroll growth in August. No boom, no recession. Just a plow horse rolling on.

This is measured good news. Both are up from abysmal levels. 2.2% (flat) imports is a sign of consumptive malaise. 7% growth in exports means we still can compete and sell on the world market so maybe it really still is worth turning around the anti-business climate in this country.

"Exports are now at all-time record highs and do not show any clear signs of slowing due to the financial situation in Europe or a slowdown in China."

Hard to criticize that--except to note that it undercuts the argument that the US economy is slowing down because of Europe.

True. Also undercuts the claim that exports are up because of the President's policies. The increase according to the original story comes oil and energy production, but that occurred outside of limits the Obama administration placed blocking deep sea drilling, ANWR Alaska still blocked, one pipeline blocked, one closed, and drilling limits on federal lands.

The only sign of economic health came from an industry the President sought to take down.

New orders for durable goods increased 4.2% in July, (4.5% including upwardrevisions to June) easily beating the consensus expected gain of 2.5%. Ordersexcluding transportation declined 0.4%, (-1.1% including downward revisions to June)falling short of the consensus expected gain of 0.5%. Overall new orders are up 4.9%from a year ago, while orders excluding transportation are down 0.3%.

The gain in overall orders was led by civilian aircraft and motor vehicles.

The government calculates business investment for GDP purposes by using shipments ofnon-defense capital goods excluding aircraft. That measure was flat in July, but up0.5% including upward revisions to June, and was up at a 5.4% annual rate in Q2versus the Q1 average.

Unfilled orders were up 0.8% in July and are up 8.0% from last year.

Implications: Overall new orders were up big in July, but the underlying details ofthe report suggest some hesitation in business investment. Durable goods orders rose4.2% in July and were revised higher for June, but all of the gain was due to thevolatile transportation sector, including civilian aircraft and autos. Meanwhile,industrial machinery fell for the second month in a row and is down 11.1% from ayear ago. Although unfilled orders for durable goods were up 0.8% in July, unfilledorders for &ldquo;core&rdquo; capital goods were down for the second month in a row.On the brighter side, shipments of &ldquo;core&rdquo; capital goods, which excludesdefense and aircraft were unchanged in July, but were revised higher in June and areup 6.2% in the past year. Believe it or not, the flat reading in July is not asurprise. Core shipments have dropped in the first month in 9 of the past 11quarters, with a rebound in the following two months. The declines in machinery andunfilled &ldquo;core&rdquo; capital goods orders show that some companies may bepostponing purchases until after the election. If this slowdown in purchasescontinues, expect a rebound after the election when companies have a better gauge offuture policy. Monetary policy is loose, corporate profits are close to recordhighs, balance sheet cash is near a record high (earning almost zero interest), andwe are in the early stages of a home building recovery. Moreover, capacityutilization at US factories is approaching its long-term norm, meaning companieshave a growing incentive to update their equipment.

Obama's Fiscal Swan Dive .Article Comments (23) more in Political Diary | Find New ».smaller Larger facebooktwittergoogle pluslinked ininShare.0EmailPrintSave ↓ More ..smaller Larger By STEPHEN MOORE Wall Street analysts are warning about the negative impact of the federal tax time bomb on stocks. Their advice: Sell your equities now and pay lower taxes on stock gains than Uncle Sam will charge in 2013 if President Obama is re-elected.

Under Mr. Obama's plan, which takes effect automatically unless the tax hike is called off, the capital gains tax rate rises to 23.8% from 15%; and small-business profits are taxed at just over 40%, up from 35% now. Selling stocks immediately or pulling profits out of a firm before 2013 can make good business sense, advisers are urging clients.

Another reason to sell now, some economists argue, is that the stock market could tumble if investors become convinced that Mr. Obama will win the election. One of the top analysts on Wall Street, David Malpass, told his clients this week: "The year-end tax increase, which [the Congressional Budget Office] now projects will cost the private sector $5.2 trillion over ten years, is scheduled to hit not only income but also capital through the big tax increases on capital gains and dividends. Increases in the taxation of capital cause a direct and immediate reduction in asset prices, which we think will fall materially if the probability of the tax increase rises."

James Pethokoukis of the American Enterprise Institute notes that the Obama tax increase for 2013 would take 3.5 percent from GDP next year, which is twice as high as any tax increase in nearly a half-century. The previous high was LBJ's Vietnam War surtax, which cost the economy 1.7 percent of GDP. He calls this the "fiscal drag" effect of Mr. Obama's spending policies. Even the CBO report issued this week predicts that taxes as a share of GDP will rise to 18.4% from 15.7% of GDP.

Reagan economist Arthur Laffer says the effect of the 2013 tax increase will be to cause "an acceleration of economic activity at the end of this year ahead of the higher tax rates, then a big decline in output in 2013. It's going to be very bad." This kind of behavior—accelerated bonuses, for example—is what happened in 1993 before Bill Clinton's tax hikes.

Many investors don't believe the tax time bomb will ever detonate no matter who wins the election, and they may be right. Mr. Obama extended all Bush tax cuts after the 2010 elections. Even CBO is warning of a recession if Washington jumps. But in a statement to reporters earlier this week, White House press spokesman Jay Carney showed no signs of a backing down and reiterated Mr. Obama's commitment to raising tax rates next year on "the top 2 percent."

The ISM Manufacturing Index Declined to 49.6 in August from 49.8 in July To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 9/4/2012 The ISM manufacturing index declined to 49.6 in August from 49.8 in July, coming in below the consensus expected 50.0. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)The major measures of activity were mostly lower in August. The new orders index declined to 47.1 from 48.0, the production index slipped to 47.2 from 51.3 and the employment index dipped to 51.6 from 52.0. The supplier deliveries index rose to 49.3 from 48.7.The prices paid index rose to 54.0 in August from 39.5 in July.Implications: The ISM manufacturing index came in below 50 for the third month in a row. On its face, this suggests a contraction in the factory sector. However, as we’ve been repeating the past few months, it’s important to keep in mind that when financial strains (such as news out of Europe) and uncertainty out of Washington push down consumer confidence, it also often pushes down the ISM index as well. In other words, recent sub-50 ISM reports do not signal a recession and probably underestimate actual business activity in the factory sector. This view is supported by looking at the manufacturing group in industrial production. Even though the ISM manufacturing index contracted in June and July, manufacturing output rose in both months. Early signs suggest continued growth in August. Notably from today’s report, although the employment index fell to 51.6 it continues to show expansion. On the inflation front, the prices paid index rose to 54.0 in August from 39.5 in July, reflecting a bounce back from the recent steep drop in energy prices and other commodities. In other news this morning, the Census Bureau reported that construction fell 0.9% in July, coming in below the consensus expected gain of 0.4%. The decline in July was led by home improvements, which are still up 15% from a year ago. Commercial construction also declined in July, led by power plants and manufacturing facilities. However, both of these categories are up around 20% from a year ago.Monday Morning Outlook ________________________________________Still No Recession in Sight To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 9/4/2012 Real GDP in the US has grown 2.3% in the past year, a mediocre rate of growth, little different than its 2.2% average since mid-2009, when the recovery officially began. It’s what we call the Plow Horse economy and we expect it to continue plodding along, at least through this fall.We expect this for both “macro” and what we could call “micro” reasons – both the “big picture” and the “details.”Take the big picture. Loose monetary policy, relatively low marginal tax rates (still!), and technological advances support growth. Entrepreneurs are relentlessly pursuing business opportunities that few could even imagine only a decade ago. This could, and should, create a boom.But all of these factors combined are not going to get us to rapid and persistent economic growth – 4% plus – without more freedom. The US government grew by leaps and bounds in the past decade, and the extra spending and threat of higher future taxes – not the remnants of the financial crisis – are stifling growth, holding us back in mediocrity.The micro details also suggest some optimism about the economy. Payrolls are expanding and wages are growing. Private sector payrolls are up 160,000 per month in the past year, while cash wages per hour are up 1.7% during that same time period.Meanwhile, consumers’ financial obligations – recurring payments like mortgages, rent, car loans/leases, student loans, credit cards – are now the smallest share of income since 1993. As a result, consumer spending has more room to grow. (And it’s not just iPads. Look for solid reports later today on August sales of cars and trucks.)Home building might provide the perfect picture of the economy right now. Housing starts are up more than 20% from a year ago, while every other piece of housing related news has turned the corner. This is the sector that pessimists argued must recover to have a real broad economic recovery. The only problem is that residential construction is such a small share of GDP – less than 2.5% of the economy. So, even as housing rebounds rapidly, it is only adding a couple of tenths to the growth rate of overall real GDP.That won’t last forever. Eventually, housing will have gathered enough momentum to make a bigger difference for the overall economy. But, for the time being, there’s only so much it can do.The bottom line right now is that the US economy looks a lot like France. No, not the French economy today which is teetering on the brink of recession. We mean the French economy of the past generation, which has averaged real GDP growth of around 2% and unemployment of 8%.In order to accelerate and turn back into the United States of the 1980s and 1990s, rather than the Plow Horse Economy of today, it will take a change in the direction of policy. We think the pendulum is swinging, but nothing is for sure. The good news, we suppose, is that growth continues even though it’s slow and plodding.

Private businesses added more workers than expected in August, according to a report released Thursday, while unemployment claims fell for the first time in four weeks, positive signs for the labor market ahead of Friday's monthly jobs report.

Private-sector jobs in the U.S. increased by 201,000 last month, according to a national employment report calculated by payroll processor Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

The August number was well above the 145,000 expected by economists. The July estimate was revised to 173,000 from the 163,000 reported last month.

The ADP survey tallies only private-sector jobs. The Bureau of Labor Statistics' nonfarm-payroll data, to be released Friday, include government workers, whose ranks have been falling in recent years as state and local governments have cut staff to close budget gaps.

Economists surveyed by Dow Jones Newswires expect total nonfarm payrolls increased by 125,000 in August, and the jobless rate is projected to remain at 8.3%.

Forecasters are unlikely to change their projections for Friday's payrolls, in part because ADP has had big misses in recent months. For June employment, for example, ADP originally estimated 176,000 new jobs, but the total original gain was only 80,000.

Service-sector jobs increased by 185,000 in August, while factory jobs increased by 3,000.

ADP, of Roseland, N.J., says it processes payments of one in six U.S. workers. St. Louis-based Macroeconomic Advisers is an economic-consulting firm.

Meanwhile, initial jobless claims were down 12,000 to a seasonally adjusted 365,000 in the week ending Sept. 1, the Labor Department said Thursday. Economists surveyed by Dow Jones Newswires expected 370,000 new applications for jobless benefits last week.

Claims for the week ending Aug. 25 were revised up to 377,000 from an initially reported 374,000. Unemployment claims are a measure of layoffs.

The four-week moving average of claims—which smooths out weekly data—grew by 250 to 371,250.

Friday's monthly jobs data could spur the Federal Reserve to take steps to stimulate the economy. The central bank has said it is monitoring the employment situation, and Chairman Ben Bernanke last week signaled in a speech in Jackson Hole, Wyo., that the Fed is considering another bond-buying program.

The Fed's policy makers next meet formally on Sept. 12 and 13.

The jobless numbers will be also closely watched by voters, with the report coming on the heels of the Democratic National Convention in Charlotte, N.C. The president and his allies argue their policies have led to consistent job creation, but Republicans have blamed the administration for a still-high jobless rate.

A Labor Department economist said Thursday that there was nothing unusual about the weekly data, adding that there was no indication Hurricane Isaac, which hit Louisiana last week, affected the numbers.

The report showed the number of continuing unemployment benefit claims—those drawn by workers for more than a week—dropped by 6,000 to 3,322,000 in the week ending Aug. 25. Continuing claims are reported with a one-week lag.

The number of workers requesting unemployment insurance was equivalent to 2.6% of employed workers paying into the system in the week ending Aug. 25. The rate has remained constant since mid-March.

Research Reports ________________________________________The ISM Non-Manufacturing Index Increased to 53.7 in August, Easily Beating the Consensus Expected To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 9/6/2012 The ISM non-manufacturing index increased to 53.7 in August, easily beating the consensus expected 52.5. (Levels above 50 signal expansion; levels below 50 signal contraction.)The direction of the key sub-indexes was mixed in August but all were above 50. The supplier deliveries index gained to 51.5 from 49.5 and the employment index rose to 53.8 from 49.3. The business activity index declined to 55.6 in August from 57.2 and the new orders index fell to 53.7 from 54.3.The prices paid index rose to 64.3 in August from 54.9 in July.Implications: Solid news on the economy coming from multiple reports today. After hitting some clay in the second quarter, the plow horse economy looks to have picked up a little speed in Q3. The ISM services index came in higher than the consensus expected in August, signaling a combination of some acceleration in that sector and an abatement of negative sentiment regarding Europe. The sub-index for business activity – which has a stronger correlation with economic growth than the overall index – remains at a healthy 55.6 and the employment sub-index rose to 53.8 after slipping below 50 in July, great news. This is consistent with reports on the labor market out today (mentioned below). On the inflation front, the prices paid index rose to 64.3 and is consistent with our view that the recent lull in inflation is temporary given the loose stance of monetary policy. In other news this morning, the ADP Employment index, a measure of private-sector payrolls, increased 201,000 in August, the largest gain in 2012. Initial claims for unemployment insurance dropped 12,000 last week to 365,000, while continuing claims for regular state benefits declined 6,000 to 3.32 million. Based on these figures, as well as the Intuit small business report, we are revising our final forecast for tomorrow’s official payroll report to 130,000, both nonfarm and private. The unemployment rate should hold at 8.3%.

Private sector payrolls increased 103,000 in August (83,000 with downward revisions to June/July). August gains were led by restaurants & bars (+28,000), professional & tech services (+27,000), and health care (+17,000). The weakest sector was manufacturing (-15,000).The unemployment rate fell to 8.1% from 8.3%.Average weekly earnings – cash earnings, excluding benefits – were unchanged in August but up 1.7% from a year ago.Implications: Today’s labor market report was disappointing. Payrolls continued to grow in August, but at a slower pace than the consensus expected, up only 55,000 including revisions to prior months. This does not mean the economy is going back into recession; it just means we’re not breaking out of the modest “plow horse” growth path of the past couple of years. In our view, a breakout requires a change in public policy on taxes, spending, and regulation. Some firms are waiting until the election to decide whether to invest, whether to hire, and how much. Sometimes, the details in a report show better growth than the payroll headline, but not his time. Civilian employment, an alternative measure of jobs that includes small business startups, declined 119,000. Although the unemployment rate fell to 8.1%, the drop was due to the labor force declining by 368,000. The labor force participation rate dropped to 63.5%, the lowest since 1981. (Note: the labor force is still up 720,000 from a year ago even as the jobless rate is down a full percentage point.) The news on hours and earnings were also soft. Average weekly hours were revised down for July and unchanged in August; average hourly earnings were flat in August as well. Still, a proxy for consumer purchasing power – total cash earnings, which excludes fringe benefits – are up 3.8% from a year ago, so we expect consumer spending to keep growing. One thing to keep in mind, is that we have seen similar job reports before at a similar time of year. Private payrolls grew at an average pace of 261,000 from February to April 2011 before averaging 109,000 in the four months through August 2011. This year, private payrolls grew an average of 226,000 in the first quarter before slowing to an 111,000 pace in the past four months. In other words, some of the fluctuations in job creation appear to be seasonal. Another example is auto manufacturing, up 14,000 in July but down 8,000 in August, following a similar pattern as last year. If these patterns continue to hold, expect a stronger jobs report next month. The big question is what all this means for next week’s meeting at the Federal Reserve. We still think a third round of quantitative easing would be a mistake; the economy needs better fiscal and regulatory policy, not more excess reserves in the banking system. But today’s news gives Chairman Bernanke no reason to change his “grave” concern about the labor market or support for QE3.

Ben Bernanke's latest announcement may provide a short-term boost to America's love affair with bonds—but at the risk of longer term pain.

The Fed chairman last week unveiled a new program of easy money to help kick start the economy. He will, in layman's terms, print money and use it to buy bonds, hoping to drive down interest rates and boost economic activity. It's the third time he's done this since 2009. He says he is willing to continue the latest program until it works.

Americans are already buying up all the bonds they can get. So far this year, we've pumped $220 billion into bond funds, even while yanking $80 billion out of equity funds, according to the Investment Company Institute. In the four years since Lehman Brothers imploded, we've poured $900 billion into bond funds, while withdrawing $410 billion from equities.

No wonder Bill Gross, the money manager at Pacific Investment Management (Pimco), recently announced the death of the cult of equity. Mr. Gross, one of Wall Street's most-watched figures, said that investors were finally giving up on the siren song of the 1990s, when "stocks for the long run" was deemed a guaranteed ticket to wealth.

An investor today, he noted, "can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously 'safer' investment than a diversified portfolio of equities."

Any mom-and-pop investor knows the feeling. Bonds are up across the board. Vanguard's Total Bond Market Index Fund has returned 20% in three years and nearly 40% over five.

Wonderful news, yes.

But there's a catch.

Bonds are like a seesaw. When the price goes up, the yield goes down. And bond investors today may be making the same errors that people made with stocks in the late 1990s. They may be mistaking rising prices as a sign of safety, when they are really a sign of rising risk. They may be mentally extrapolating past performance into the future.

They may also be slaves to the mindless box-ticking known as "modern portfolio theory." In the 1990s, baby boomers were urged by Wall Street to have all their money in stocks "for growth." Now the boomers, nearing retirement, are being told to have all their money in age-appropriate bonds for "safety and income."

Price? Valuation? Who cares?

Ask Mr. Gross. Yes, he said the cult of equity was dead. But in the same investment letter he offered a serious caution to bond investors, too. "With [long-term] Treasurys currently yielding 2.55%," he wrote, "it is even more of a stretch to assume that long-term bonds—and the bond market—will replicate the performance of decades past."

No kidding. Do the math.

Bonds have typically returned less than 2% a year when measured in real, inflation-adjusted dollars, according to research by Elroy Dimson, Paul March and Mike Staunton at the London Business School.

Today the 10-year Treasury yields 1.8%, the 30-year, 3%. Good luck squeezing 2% plus inflation, or anything like it, out of that.

At these levels, government bonds can only match past returns in real dollars if we get serious price deflation. That almost never happens. Since Pearl Harbor, U.S. prices have fallen in just three, isolated years. In the average year, they've risen about 4%. Someone buying long-term bonds yielding 1.5% or 2%, and then seeing consumer-price inflation of 4% a year, will be on the losing end of the bet.

Treasury inflation-protected securities, or TIPS, offer a yield automatically adjusted for inflation. Today, TIPS of up to 20 years' maturity lock in real yields of zero percent a year or less. The five-year TIPS promises to lose 1.6% of your purchasing power ever year. Some deal.

Corporate bonds always yield more than government bonds, to account for risk. But the spreads are unappealing. Even riskier investment-grade bonds yield only about 3.5% on average, reports data service FactSet.

Investors these days are much wiser about stocks than they were in the 1990s. They know all that talk about big guaranteed returns was misleading because, historically, those returns came in waves. Stock investors made their money in the 1920s, in the 1950s and 1960s, and in the 1980s and 1990s. In other periods, they made very little. The period since 2000 has been one of those times.

Investors also need to understand that the same is true of bonds. According to London Business School research, most of the real, inflation-adjusted returns from U.S. bonds over the past 100 years came in just two eras: the 1920s and 1930s, and since 1981. In other periods, bondholders fared far worse. In the 1970s, long-term bonds were such a poor investment that they became known as "certificates of confiscation."

Waves come and go. The current bull market in bonds must end in due course. Maybe the risk is down the road. It won't come until inflation or interest rates rise. So far, the economy remains sluggish, real unemployment is disturbingly high and inflation is minimal (although at 1.4% it still remains high enough to eat nearly all the interest from your 10-year Treasurys).

Nonetheless, the risk remains. Sooner or later investors will face either a loss of money, or at best meager returns.

It's easy to dismiss the warnings today. Those who have been cautioning about bonds for the past few years have been left looking foolish. A bubble, longtime Wall Street observer Jim Grant noted dryly last year, could be called a bull market that the commentator missed.

Yet this has happened before. Many who warned about stocks in the 1990s were too early. Jeremy Grantham, chairman of Boston investment firm GMO, recalls losing swathes of clients before the bubble popped. Today, his firm warns against U.S. bonds, which it considers an even worse deal than stocks.

In the past five years, index funds tracking longer-term Treasury bonds have risen by a fifth or more in price. If and when the bond bull market ends, funds may retrace those steps. That would be a big fall.

As a rule, a new 10-year Treasury bond with a 1.8% yield would be expected to fall nearly 10% in price if interest rates rose by one percentage point.

The paradox of government policy is that it leaves you so few places to hide. You can still find the occasional blue-chip stock yielding more than Treasurys, such as Johnson & Johnson JNJ +0.25%(JNJ), H.J. Heinz HNZ -0.05%(HNZ) and Pfizer PFE -0.21%(PFE). An equity-income mutual fund that is light on financials, such as Vanguard Equity Income Fund (VEIRX), offers a basket of them. It yields 3%.

But such stocks are getting harder to find. Investors worried about the prospects of bonds may also hold a bit more cash and wait for better entry points.

I am no prognosticator, but... I don't see a path for avoiding a market collapse in 2012.

Capital gains taxes on the rich will triple if Obama is reelected and his agenda is implemented. It is the end of productive investment as we once knew it.

If there is a complete Republican sweep in 6 weeks, there is still no mechanism available in 2012 to avoid this before swearing in a new President, House and Senate. No matter what detail candidate Romney espouses, the sausage making of new policy must necessarily go through a divided senate.

The tax rate on the least rich of the working people who pay income tax will go up 50% (from 10 to 15%) under current policy if nothing is done, and nothing is being done. The percentages are lower for higher brackets, but the dollar amounts are larger.

If you buy and hold publicly traded stocks, good for you (as Elizabeth Warren says), but you share ownership in these companies with other people who use other strategies and timeframes for ownership and selling. Good management and profitable returns can not prevent market value corrections in the short run.

The business climate for startup companies is a disaster, but if you have investments with accumulated capital gains over this relatively good market for established, publicly traded companies, you will need to capture those gains (sell) before the end of the year in order to pay the tax before rate increases set in automatically.

Unfortunately, everyone else in the US market is in that same conundrum, so you need to sell before them too or else there will be no gains to capture, just panic selling. I would start selling by mid-September if I were you (today is the 24th) if not sooner. (

Investment pullback and market losses tend to spill over into employment and income losses, we recently learned, hurting future business prospects.

This is not 2008 exactly because housing and financial markets already went through some correction, but the fiscal cliff sure looks familiar.

Today at this writing the markets are up slightly. If it closes down slightly, that would make 4 days in a row and talk of real pessimism at some point could begin.

Please post in detail the error of my thinking - or learn to live with your losses. - Doug

I am no prognosticator, but... I don't see a path for avoiding a market collapse in 2012.

Capital gains taxes on the rich will triple if Obama is reelected and his agenda is implemented. It is the end of productive investment as we once knew it.

If there is a complete Republican sweep in 6 weeks, there is still no mechanism available in 2012 to avoid this before swearing in a new President, House and Senate. No matter what detail candidate Romney espouses, the sausage making of new policy must necessarily go through a divided senate.

The tax rate on the least rich of the working people who pay income tax will go up 50% (from 10 to 15%) under current policy if nothing is done, and nothing is being done. The percentages are lower for higher brackets, but the dollar amounts are larger.

If you buy and hold publicly traded stocks, good for you (as Elizabeth Warren says), but you share ownership in these companies with other people who use other strategies and timeframes for ownership and selling. Good management and profitable returns can not prevent market value corrections in the short run.

The business climate for startup companies is a disaster, but if you have investments with accumulated capital gains over this relatively good market for established, publicly traded companies, you will need to capture those gains (sell) before the end of the year in order to pay the tax before rate increases set in automatically.

Unfortunately, everyone else in the US market is in that same conundrum, so you need to sell before them too or else there will be no gains to capture, just panic selling. I would start selling by mid-September if I were you (today is the 24th) if not sooner. (

Investment pullback and market losses tend to spill over into employment and income losses, we recently learned, hurting future business prospects.

This is not 2008 exactly because housing and financial markets already went through some correction, but the fiscal cliff sure looks familiar.

Today at this writing the markets are up slightly. If it closes down slightly, that would make 4 days in a row and talk of real pessimism at some point could begin.

Please post in detail the error of my thinking - or learn to live with your losses. - Doug

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Brebner and Xiao are pretty frank about how levered up the financial system is at the moment, and they warn that the next shock will be totally involuntary and unexpected.

Here is what the analysts have to say about how upside down the world is right now and the risks looming on the horizon:

We believe the balance of 2012 could remain challenging for investors, given the many negative indicators and warning signs. Certainly extremes in leverage in the Western economies and questions regarding growth in China present investors with a worrying post-2012 future. However, in our view there are nearly zero real choices available to global policy makers.

Had dinner with execs of the biggest multi-national here, picked up that they are looking at Europe for trouble, which means more trouble than what we all already know and on a scale to have repercussions here. I mentioned my expectation of collapse-here-now and in a scary way heard no disagreement there either.

I wish no economic decline on anyone but maybe we will get a new awareness of policy bungling get and a new government out of it. The fiscal cliff in Washington is a refusal to cut spending during a 4th straight trillion dollar deficit and an insistence on raising tax rates when we know that will make things worse. There are mountains of new taxes and regulations coming, Europe is on the brink, China: who knows, economic reports are coming from the failed recovery summer 3.0 just ended, and more Obamacare mandates kicking in. There are way too many more shoes possible to drop on this eggshell economy and no positive seeds have been planted in years to cause an upward turn.

Markets down only a smidgen over the last 5 days so my prediction so far is wrong. We will see.